While Comcast as a company turned in strong results in 2017, the video business turned distinctly sour. With mounting license fees, continued price pressure, and increasing online competition expect more of the same in 2018.

Comcast had another good year in 2017. Revenue grew 5% to $84 billion, customer relationships increased 770,000, and broadband customers increased by 1 million. NBCU also did well, increasing revenue 4.4% to $33 billion.

Terrible year for pay TV at Comcast

The pay television business, on the other hand, did very poorly. Revenue increased 3.5% during 2017, to $23.1 billion, though at a much smaller profit margin. In 2016, Comcast defied the rest of the industry by increasing video subscribers 103,000. Many attributed these excellent results to the impact of Comcast’s market-leading X1 television service. If that was the case, X1’s allure seems to have worn off.

2017 saw the company lose 186,000 video customers. The fourth quarter results were particularly bad. Normally the fourth quarter is a good one for pay TV as people load up on entertainment for the holidays. In 2017, though online video providers like Netflix saw a big surge in sign-ups, Comcast did not. It lost 38,000, versus a 68,000 gain in Q4 2016.

Comcast’s voice services also took a beating in 2017. Revenue was down 4%, and subscribers fell 13,000. However, the voice business represents just 4% of Comcast’s total revenue, whereas pay TV is 27%.

Pay TV margins fall sharply

Comcast managed to hold price increases in pay TV to below the inflation ration rate in 2017. Average video revenue per subscriber reached $84.70 in Q4 2017, 1.3% higher than one year earlier. Inflation was 2.1% in 2017. Though the small increase is great news for customers, it is very bad news for Comcast. Particularly in light of the huge increase in programming costs the company faced.

Comcast paid $3.2 billion in programming fees in Q4 2017, nearly 11% higher than one year earlier. That works out to $47.84 per month per subscriber. For every dollar Comcast receives in pay TV revenue, it pays 57 cents directly to television programmers. In 2014, it paid 48 cents of every dollar earned in pay TV revenue to programmers.

Of course, Comcast is also the beneficiary of the sharp increase in programming licensing fees through NBCU. Cable network distribution revenue increased 7.5% in just the fourth quarter of 2017. Overall, broadcast revenue increased 4.1% in 2017, with a large increase in distribution revenue partially offset by a decline in advertising.

What Comcast pay TV results say about the industry

The lower-than-inflation increase in video ARPU is likely due to heavy discounting of video services as part of the triple play bundle. For example, in the Bay Area, a customer can sign up for Comcast voice, video, and data services for just $90 a month for the first year. Other providers, like AT&T and Verizon, are following the same path.

The devaluing of pay TV services is liable to get worse in 2018. T-Mobile is poised to enter the pay TV market after it completed the acquisition of Layer3 TV this week. It promises a disruptive approach to the pay TV business. vMVPD services like Sling TV and DirecTV Now will also increase the downward pressure on traditional pay TV rates.

Programmers are in no mood to restrain their demands for higher licensing fees. vMVPDs are happy to pay these higher fees and are prepared to put up with charging subscription fees that deliver little or no profit. Expect pay TV margins to continue to erode at the current pace throughout 2018.

Finally, it is telling that the usual bump in pay TV subscribers in the fourth quarter has now vanished, even for the marketing-leading X1 television service. Consumers appear to be looking to SVOD to provide additional entertainment during the holidays. Netflix gained a better than expected 2 million subscribers in the fourth quarter in the U.S. The Digital Entertainment Group reports that SVOD revenue as a whole saw relatively small growth in the first three quarters of 2017, but finished the year with a huge 35% increase in Q4.

Why it matters

X1 has failed to sustain a turnaround in the pay television business for Comcast.